General Insurance Concepts Flashcards
Agent/Producer
a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer
Applicant or proposed insured
a person applying for insurance
Broker
an insurance producer not appointed by an insurer and is deemed to represent the client
Indemnity
main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss
Law of large numbers
the larger the number of people with a similar exposure to loss, the more predictable actual losses will be
Reciprocity/Reciprocal
a mutual interchange of rights and privileges
Insurance
the transfer of risk of loss. The cost of an insured’s loss is transferred over to the insurer and spread among other insureds.
Risk
the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.
Pure risk
situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.
Speculative risk
involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.
Hazards
conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.
Physical hazards
individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.
Moral hazards
tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.
Morale hazards
similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without a forethought may cause physical injuries.
Perils
causes of loss insured against in an insurance policy.
Loss
the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.
Methods of Handling Risk
Sharing, Transfer, Avoidance, Retention, Reduction
What are the five characteristics of an ideally insurable risk?
Loss must be 1) due to chance, 2) definite and measurable, 3) statistically predictable, 4) not catastrophic, and 5) Coverage cannot be mandatory.
When does an insurance policy go into effect?
When the policy is delivered and the premium is paid
For the purpose of insurance, what is risk?
Uncertainty of loss
Pure risk
A situation in which a person can only experience a loss and no gain presents what type of risk?
What entities make up the Medical Information Bureau?
Insurers
When agents act within the scope of their contract, their actions will be assumed to be the acts of whom?
Insurer
What is a warranty in an insurance contract?
An absolutely true statement upon which the validity of the insurance contract is based
